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Pricing tailwinds contributed to PE firm's $750M Convex investment

Onex Corp.'s history of success with insurance-related portfolio companies and momentum in specialty property and casualty pricing contributed to the private equity firm's decision to make a substantial investment in a startup venture with a strong pedigree.

Convex Group Ltd., headed by Catlin Group Ltd. founder Stephen Catlin and longtime Catlin executive Paul Brand, received $1.8 billion in commitments from investors, including $750 million apiece from Onex Partners V LP and Public Sector Pension Investment Board. An international specialty insurer and reinsurer focused on complex risks, Convex is banking on its legacy-free balance sheet and the reputation of its executive team to generate top-quartile returns and create what Catlin described as "the insurance company of the future."

The investment in Convex represented an attractive opportunity in an industry where Onex has had decades of success through a company managed by executives with whom it was familiar, Senior Managing Director Robert Le Blanc said during a recent investor day.

Convex leadership was "keen to partner" with Onex given a "long successful history in investing in the insurance industry," Le Blanc said, adding that the connections Catlin and Brand have in the industry played an important role in the two sides coming to the conclusion that they would be good partners "from a cultural perspective."

But Onex's investment did not rest solely on faith in Catlin's and Brand's ability to deliver results. Le Blanc said the firm's past investment in insurance brokerage USI Insurance Services LLC and current position in specialty brokerage Ryan Specialty Group LLC provided it with unique insight into P&C market conditions. Those investments, especially the latter, have shown Onex "what the results looked like for the carriers going in and how the market was hardening from a rate perspective," Le Blanc said. "So all of those things together allowed us to do that deal also on a proprietary basis."

Onex exited its investment in USI in 2017 in a transaction with KKR & Co. and Caisse de dépôt et placement du Québec. In a transaction with an enterprise value of $4.3 billion, Onex Partners III LP received total proceeds of $2.1 billion. It claimed a gross multiple of invested capital of 3.4x and a gross rate of return of 34%. The investment was such a success that Le Blanc said, upon completing the sale, that he was sorry to see it go.

About one year later, Onex announced the investment of $150 million of preferred equity and $25 million of common equity in Ryan Specialty Group. Le Blanc earlier this year noted that Catlin and Pat Ryan, founder of both Ryan Specialty Group and Aon PLC, have been "friends for years."

"I would expect us to be doing a lot of business with Ryan Specialty," Le Blanc said.

Public Sector Pension Investment Board also is no stranger to insurance distribution. PSP Investments took a substantial minority stake in wholesale brokerage AmWINS Group Inc. in April 2015 and revealed an investment in Alliant Insurance Services Inc. in January.

Convex recently announced the latest development in its go-to-market strategy as it disclosed that affiliate Convex Insurance UK Ltd. had been added to the National Association of Insurance Commissioners' Quarterly Listing of Alien Insurers, effective Oct. 1. That designation gives Convex the ability to write U.S. excess-and-surplus lines business.

The company was one of four additions to the NAIC list in the latest update, joining an affiliate of Cigna Corp. and two Everest Re Group Ltd. subsidiaries.